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Tuesday
Feb112014

Peddlers and Princes

Clifford Geertz wasn’t just interested in the nature of the Balinese state, he was also interested in central problems of economic development.

In his book Peddlers and Princes, he examined the comparative development of two towns, Tabanan in Bali, the capital of a pre-colonial state with the same name, and Modjokuto in Eastern Java.

The overarching agenda of the book is to show how social structure influences the possibilities for creating economic development and Geertz shows historically how and why these two towns ended up with very different social structures. By this, Geertz means that even if the basic economic challenge was the same the problems that stopped it being solved were very different.

But what was this economic challenge?

Geertz explains:

Sociologically speaking, perhaps the major difference between a modern economy and a traditional one is that the former is marked by a very large number of social structures, institutions and roles specifically adapted to fulfill economic functions as opposed to others, while for the most part the later is not: … The firm is an excellent sociological benchmark of development … precisely because it is such a specifically economic institution, a miniature social system specialized to perform economic functions and integrated in terms of economic values. And it is such firms that the entrepreneurs of both Modjokuto and Tabanan are trying to create. (p. 137).

So Geertz focuses on the problem of creating firms. 

This is of course well-trodden territory within economics. There are many interesting and empirically relevant theories of how efficient firms may emerge to solve problems that markets cannot, or why such efficient organizations may not emerge because of credit market imperfections, holdup problems or incomplete contracts.

But Geertz has in mind more sociological constraints on the formation of firms. He argues that

the construction of a viable firm … requires two very difficult and somewhat contradictory achievements: a sufficient degree of independence of the – from an economic point of view – non-rational pressures of institutional custom, and the establishment of an accepted normative code in terms of which completely economic activities can be regulated. Without the first, business firms sink into the inefficiency with which those of Tababan are usually threatened; without the second they flounder on the shoals of mistrust, as Modjokuto’s tend to do. (p. 138)

In the next two posts, we will see how budding entrepreneurs in Tabanan and Modjokuto were trapped between the Scylla of non-rational pressures of institutional custom and the Charybdis of lack of an accepted normative code.

Thursday
Feb062014

The 1906 Badung Puputan

The world of the theatre state that we described in our last post came to a brutal end with the final annexation of Bali by the Dutch in 1908. The ritual suicides (Puputan, from the Balinese word puput meaning ‘finishing’ or ‘ending’) that took place as a consequence of the Dutch annexation of Bali are one of the less well known atrocities induced by European colonialism.

According to Robert Pringle’s A Short History of Bali, they led to 1,100 deaths (p. 106). The most notorious of these took place as the invading Dutch approached Denpasar, the capital of the pre-colonial state of Badung.

Pringle quotes a contemporary account of the carnage that this created (p. 104)

As they drew closer, they observed a strange, silent procession emerging from the main gate of the puri. It was led by the Radja himself, seated in his state palanquin carried by four bearers, dressed in white cremation garments but splendidly bejeweled and armed with a magnificent kris. The Radja was followed by the officials of his court, the armed guards, the priests, his wives, his children and his retainers, likewise dressed in white, flowers in their hair….One hundred paces from the startled Dutch, the Rajda halted his bearers, stepped from his palanquin, gave the signal, and the ghastly ceremony began. A priest plunger his dagger into the Radja’s breast, and others in the company began turning their daggers upon themselves or upon one another. The Dutch troops, startled into action by a stray gunshot and reacting to attack by lance and spear, directed rifle and even artillery fire into the surging crowd. Some of the women mockingly threw jewels and gold coins to the soldiers, and as more and more people kept emerging from the palace gate, the mounds of corpses rose higher and higher. Soon to the scene of the carnage was added the spectacle of looting as the soldiers stripped the valuables from the corpses and then set themselves to sacking the palace ruins.

Not quite the ‘civilizing mission’.

Geertz commented on this as follows

the king and court again paraded, half entranced, half dazed with opium, out of the palace into the reluctant fire of the by now thoroughly bewildered Dutch troops. It was quite literally the death of the old order. It expired as it had lived: absorbed in a pageant.

Tuesday
Feb042014

The Theatre State

In earlier blog posts, we have taken issue with the dominant ideas about the state in the social science literature. For instance, we looked at Berber society through the lens of Ernest Gellner’s book Saints of the Atlas and showed that contrary to what Max Weber had suggested, it was not the state that had the legitimate monopoly of violence,” but society.

A different powerful critique of central notions of how states work is due to another social anthropologist, Clifford Geertz, and in the next several posts we will discuss Geertz’s ideas and use them as a steppingstone for thinking about state-society relations.

Geertz’s seminal studies of Indonesian society and politics are rich in insights about the types of problems we examine in Why Nations Fail.

In his book Negara: The Theater State in Nineteenth Century Bali, Geertz provided a characterization of how the state (called the Negara) was organized and worked in 19th century Bali and he used this to make generalizations about how many pre-colonial states functioned in 19th century Southeast Asia.

Today Bali is part of Indonesia, but in the 19th century it was independent and made up of a number of separate polities. In 1800 there were probably 11.

The Dutch began their colonization by capturing part of the north coast of the Island in the late 1840s taking over the state of Buleleng. The Dutch, via the Dutch East Indian Company, had been colonizing in the region since the early 17th century but they had taken over little territory outside Java until the 19th century. Though the north coast of Bali was strategic for the Dutch, and integrated into their trading networks, it was marginal to Bali itself, the heartland of which was the southern piedmont dominated by irrigation fed rice agriculture.

The economic base of the states that dominated this piedmont, such as Tabanan, Karangasem, Klungkung, Gianyar, Mengwi and Badung, was trade in rice and other agricultural commodities such as coffee (previously slaving had been important as well).

According to most theories of the state, these states should have been heavily involved in the control of agriculture. Indeed, a famous hypothesis due to Karl Wittfogel in his book Oriental Despotism is that it was precisely societies that heavily used irrigation for agriculture that ended up with centralized despotic states. According to Wittfogel, this was because building irrigation systems required huge amounts of coordinated labor and this created a big incentive for a state to emerge to mobilize and control it all. (See this paper for a recent empirical analysis of Wittfogel’s thesis).

But Geertz pointed out that, paradoxically, the states of Bali controlled neither trade, which was mostly in the hands of Chinese merchants, nor irrigation systems and land, which were organized collectively by subaks (irrigation societies).

In fact Geertz argued that the Balinese states hardly governed anything at all and were remarkably un-bureaucratic. He painted a picture of a self-governing and self-organized society and instead characterized the state as being a “Theater State” which was mostly involved in pageants and religious rituals to justify itself and the social order unpinning it, but which did little else that was real.

Yes, the states collected tribute and taxes, but this was primarily to fund the theatrics. Geertz’s uses these cases to attack many ideas in the theory of the state, not just Wittfogel’s “hydraulic hypothesis”.

He is particularly keen to criticize the idea that the symbolism and pageantry of states are just a masquerade that tries to hide the reality of domination from people, noting (pp. 121-122)

Each of the leading notions of what the “state” is that have developed in the west since the sixteenth century — monopolist of violence within a given territory, executive committee of the ruling class, delegated agent of popular will, pragmatic device for conciliating interests — has had its own sort of difficulty assimilating the fact that this force [of display, regard and drama] exists. None has produced a workable account of its nature. Those dimensions of authority not easily reducible to a command-and-obedience conception of political life have been left to drift in an indefinite world of excrescences, mysteries, fictions, and decorations. And the connection between what Bagehot called the dignified parts of government and the efficient ones has been systematically misconceived.

This misconception, most simply put, is that the office of the dignified parts is to serve the efficient, that they are artifices, more or less cunning, more or less illusional, designed to facilitate the prosier aims of rule.

The last sentence of the book sums up his thesis:

The dramas of the theater state … were, in the end, neither illusions nor lies, neither sleight of hand nor make-believe. They were what there was.

So was Geertz right in his criticism of the social science literature on the state? How can we understand the different types of states that have emerged throughout history and in different parts of the world?

Thursday
Jan302014

Democracy vs. Inequality

President Obama’s State of the Union address promised a renewed focus on economic inequality in the last two years of his administration. But many have already despaired about the ability of American democracy to tackle increasing economic inequalities. Indeed, wage and income inequality have continued to rise over the last four decades during both periods of economic expansion and contraction. But these trends are not unique to the United States. Many OECD countries have also experienced increasing wage income inequality over the last several decades.

That these widening gaps between rich and poor should be taking place in established democracies is puzzling. The workhorse models of democracy are based on the idea that the median voter will use his democratic power to redistribute resources away from the rich towards himself. When the gap between the rich (or mean income in society) and the median voter (who is typically close to the median of the income distribution) is greater, this redistributive tendency should be greater.

Moreover, as Meltzer and Richard’s seminal paper emphasized, the more democratic is a society (meaning the wider is the voting franchise), the more redistribution there should be. This is a simple consequence of the fact that with ae wider franchise, expanded towards the bottom of the income distribution, the median voter will be poorer and thus keener on redistributing away from the rich towards herself.

These strong predictions notwithstanding, the evidence on this topic is decidedly mixed.

Our recent paper, joint with Suresh Naidu and Pascual Restrepo, “Democracy, Redistribution and Inequality” revisits these questions.

Theoretically, we point out why the relationship between democracy, redistribution and inequality may be more complex, and thus more tenuous, than the above expectations might suggest.

First, democracy may be “captured” or “constrained”. In particular, even though democracy clearly changes the distribution of de jure power in society, policy outcomes and inequality depend not just on the de jure but also the de facto distribution of power. This is a point we had previously argued in “Persistence of Power, Elites and Institutions”. Elites who see their de jure power eroded by democratization may sufficiently increase their investments in de facto power, for example by controlling local law enforcement, mobilizing non-state armed actors, lobbying, or capturing the party system. This will then enable them to continue their control of the political process. If so, we would not see much impact of democratization on redistribution and inequality. Even if not thus captured, a democracy may be constrained by either other de jure institutions such as constitutions, conservative political parties, and judiciaries, or by de facto threats of coups, capital flight, or widespread tax evasion by the elite.

Second, democracy may lead to “Inequality-Increasing Market Opportunities”.  Nondemocracy may exclude a large fraction of the population from productive occupations, for example from skilled occupations and entrepreneurship, as starkly illustrated by Apartheid South Africa or perhaps also by the former Soviet Union. To the extent that there is significant heterogeneity within this population, the freedom to take part in economic activities on a more level playing field with the previous elite may actually increase inequality within the excluded or repressed group and consequently within the entire society.

Finally, consistent with Stigler’s “Director’s Law”, democracy may transfer political power to the middle class—-rather than the poor. If so, redistribution may increase and inequality may be curtailed only if the middle class is in favor of such redistribution.

So theory may not speak as loudly as one might have first thought.

What about the facts? This is where the previous literature has been pretty contentious. Some have found inequality-reducing effects of democracy and some not.

We argue that these questions cannot be easily answered with cross-sectional (cross-national) regressions because democracies are significantly different from nondemocracies in so many dimensions.

Instead, we provide evidence from panel data regressions (with fixed effects) from a consistent post-war sample.

The facts are intriguing.

First, there is a robust and quantitatively large effect of democracy on tax revenues as a percentage of GDP (and also on total government revenues as a percentage of GDP). The long-run effect of democracy is about a 16 percent increase in tax revenues as a fraction of GDP.

Second, there is also a significant impact of democracy on secondary school enrollment and the extent of structural transformation, for example as captured by the nonagricultural share of employment or output.

Third, and in stark contrast to these results, there is a much more limited effect of democracy on inequality. Democracy just doesn’t seem to affect inequality much. Though this might reflect the poorer quality of inequality data, there is likely more to this lack of correlation between democracy and inequality. In fact, we do find heterogeneous effects of democracy on inequality consistent with the theories mentioned above, which would not have been possible if the poor quality of inequality data made it hard to find any empirical relationship.

Overall, our results suggest that democracy does represent a real shift in political power away from elites and has first-order consequences for redistribution and government policy. But the impact of democracy on inequality may be more limited than one might have expected.

Though our work does not shed light on why this is so, there are several plausible hypotheses. The limited impact of democracy on inequality might be because recent increases in inequality are “market induced” in the sense of being caused by technological change. But equally, this may be because, as in the Director’s Law, the middle classes use democracy to redistribute to themselves.

But the Director’s s Law is unlikely to explain the inability of the US political system to confront inequality, since the middle classes have largely been losers in the widening inequality trends.

Could it be that US democracy is captured? This seems unlikely when looked at from the viewpoint of our typical models of captured democracies. But perhaps there are other ways of thinking about this problem that might relate the increasingly paralyzing gridlock in US politics to capture-related ideas. 

Tuesday
Jan282014

Why Aid Fails

There is still a huge debate on the role of foreign aid in economic development.

For those interested, here is our take.

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